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Year-End Tax Planning: The Devil is in the Details

Beginning in 2018, the total amount of state tax deductions allowed as an itemized deduction will be limited to $10,000. This includes both income and real estate taxes.

Sometimes, state taxes can be deducted when prepaid. Several articles have been written that suggest prepaying your 2018 real estate tax bill prior to December 31, 2017. This will allow you to get the tax deduction on your 2017 tax return before the $10,000 limit comes into play.

But this is only a good idea if it works! One crucial detail must be in place for this planning idea to work: For real estate taxes to be prepaid, they must first be assessed. This doesn’t work in Washington State’s King County, because King County does not assess the 2018 real property tax until February of 2018.

The tax reform bill anticipated at year-end disallows prepaid tax deductions until 2018 if the taxes were not assessed in 2017—even if taxes were paid in 2017. This means the prepaid taxes would be subject to the new $10,000 limitation, as if they were paid in 2018.

To garner a federal itemized tax deduction, make sure the tax has been assessed before prepaying your state taxes. Without this detail, tax planning will not be effective.